Emotional Reactions of Students to Perceptions of Negative Trends and Small Losses in Short-Term Stock Market Simulation

Abstract

Decision-making on stock markets is a complex experience characterized by strong emotions (Nofsinger, 2017). Price fluctuations are stimuli that can cause a wide range of psychological reactions in investors (Shiv et al., 2005). In particular, the perception of loss is a central area in behavioral finance: loss aversion (Kahneman & Tversky, 1979) suggests that the psychological impact of a loss is stronger than a gain of the same size. Traditionally, attention has focused on significant financial losses or bear markets, where intense emotions such as fear and panic are commonly found (Shiller, 2014). However, our study suggests addressing a less examined side of the emotional experience: the psychological and behavioral reactions of individuals to the perception of negative trends and small losses. Our goal is to understand if and how perceived unfavorable small stock market movements could induce significant emotional responses, particularly among novice investors. For this purpose, we used a qualitative exploratory study with eight students participating in a short-term (three-day) stock market simulation. During this period, the stock market index on which the students based their investments declined by 0.36%. This fluctuation does not constitute a bear market in the financial sense generally recognized. Nevertheless, our findings show that participants actively perceived a ‘general negative trend’ and exhibited significant emotional reactions, even facing small financial losses. Based on semi-structured interviews, our article aims at: 1) identifying the range of emotions felt by participants during the simulation; 2) describing the development of these emotions in response to perceived market variations; and 3) conducting a thematic analysis of their influence on participants' decisions, with a particular focus on emotional regret related to small losses and reactions to uncertainty and perceived losses. Our results demonstrate a significant change in emotions over time. From an initial interest and a relative emotional detachment, students show a growing emotional commitment to market fluctuations. Moreover, as the experiment progresses and disappointments increase, the emotional picture is largely defined by negative emotions, notably fear in relation to potential losses, as well as sadness and disappointment related to unfavorable results. Market surprises, particularly sudden falls, lead to intense reactions, which can result in panic and impulsive decisions. Given the inability to improve the financial situation, the experience can also result in abandonment and resignation. By examining these dynamics, we aim at contributing to understanding emotional impact in behavioral finance, beyond major crisis scenarios.